For a bigger life payout, you're much better off with shares

It is no coincidence that the best-performing with-profits policies last year came from funds that have the largest proportion of their assets in equities. According to analysis for The Observer by BestInvest, Prudential topped the league table of larger providers, with a 12.4 per cent return, while CGNU (Norwich Union), Liverpool Victoria and Legal & General all managed more than 11 per cent. Shares account for more than 70 per cent of the funds of the latter three, while the Pru has 69 per cent of its assets in equities.

Standard Life, by contrast, has just 53 per cent of assets in equities and only managed a 10.4 per cent return, while Scottish Widows, with 54 per cent, grew by 10 per cent. While these may not sound like big differences, a 1 per cent difference in return, compounded over 25 years, amounts to a big difference in the final payout - the best payout on a 25-year mortgage endowment was almost £64,000, from Liverpool Victoria, and the worst was less than £37,000, from Standard Life.

Different equity weightings largely reflect companies' financial strength. When stock markets crashed at the start of the decade, all life companies were forced to sell shares and buy bonds. Seven years later, says Justin Modray at BestInvest, the better life offices are starting to recover: the weaker may never do so. The lower the equity weighting, the worse the long-term performance of the with-profits fund is likely to be.

Last week's announcement that the Pru is taking on Equitable Life's £1.8bn with-profits annuity book should, therefore, be good news for policyholders. Equitable's failure to provide properly for guarantees on its policies means its returns were falling even before the stock market crash. The Pru's investment record should mean returns improve substantially.